Madras High Court
Eicher Motors Limited vs The State Of Tamil Nadu on 6 November, 2013
Author: Chitra Venkataraman
Bench: Chitra Venkataraman, T.S.Sivagnanam
IN THE HIGH COURT OF JUDICATURE AT MADRAS Dated : 06.11.2013 Coram The Honourable Mrs.Justice CHITRA VENKATARAMAN and The Honourable Mr.Justice T.S.SIVAGNANAM Tax Case (Revision) No.49 of 2013 --- Eicher Motors Limited (Formerly M/s.Enfield India Ltd.,) Thiruvotriyur High Road Chennai-600 019 ... Petitioner -vs- The State of Tamil Nadu Rep. By The Assistant Commissioner (CT) Zone VII PAPJM Buildings Chennai-600 006 ... Respondent Tax Case (Revision) filed under Section 38 of the Tamil Nadu General Sales Tax Act, 1959 to revise the order of the Sales Tax Appellate Tribunal (Main Bench), Chennai-104 dated 27.12.2012 in T.A.No.152/04. For petitioner : Mr.N.Prasad for Mr.N.Inbarajan For respondent : Mr.A.R.Jayapratap Govt.Advocate(Taxes) ORDER
(The Order of the Court was made by CHITRA VENKATARAMAN, J.) The assessee is on Tax Case (Revision) as against the order of the Sales Tax Appellate Tribunal (Main Bench), Chennai-104 dated 27.12.2012 in T.A.No.152/04, raising the following questions of law:-
" 1. Whether in the facts and circumstances of the case, the Hon'ble Sales Tax Appellate Tribunal committed an error of law in denying the claim of exemption made by the petitioners under Explanation 3 to Section 2(r) of the Tamil Nadu General Sales Tax Act, 1959 in respect of the transfer of the Genset business, the light engineering component business and the agro engine business made by the petitioners to M/s.Greaves Limited under Business Transfer Agreement dated 15.12.1993 ?
2. Whether the Hon'ble Sales Tax Appellate Tribunal committed an error of law in applying the erroneous, legal test of requiring transfer of all businesses of an assessee as the only circumstance in which there could be exemption under Explanation 3 to Section 2(r) of the Tamil Nadu General Sales Tax Act, 1959 ?
3. Whether the Hon'ble Sales Tax Appellate Tribunal committed an error of law in emphasizing on the retention of a small part of the assets in the course of business succession, while failing to apply the correct legal test, which was to determine whether the retention of the small part of the assets was to continue in the same line of business or was being retained so as not to burden the Transferee of the business?"
2. The assessment year under consideration is 1993-94. We find from the facts narrated that the assessee carried on business in Agro Engine, Light Engineering Components, in Power Genset as well as in two-wheeler. The assessee had factories at Ranipet and Thoraipakkam as well as at Thiruvotriyur. While the Agro Engine business, Light Engineering Components business were carried on at Thoraipakkam and Ranipet units, the factory at Thiruvotriyur is engaged in Motorcycle business.
3. During the year 1995-96, M/s.Royal Enfield Motors Ltd., a unit of Eicher Tractors Limited and the name of the assessee/Royal Enfield Motors Ltd., changed into "Eicher Limited". In the year 1993, the assessee, entered into business transfer agreement with M/s.Greaves Ltd under agreement dated 15.12.1993 for the sale and transfer of its business at Thoraipakkam and Ranipet as going concern for a total consideration of Rs.45 crores subject to variation in the valuation of current assets as on the effective date of transfer -31.01.1994. The agreement contemplated the transfer of business in the manufacture of Agro-engines, Gen set at Thoraipakkam along with land and building and the business in Light Engineering components unit located at Ranipet Unit. In the revised return filed on 20.05.1994, the assessee claimed exemption on the consideration received viz., on a sum of Rs.44,67,88,548/-. In the transfer of three lines of business, the assessee had stated that it had transferred lock, stock and barrel of the trade and the consideration included non-compete fee in the said consideration to M/s.Greaves Ltd., and the assessee retained the business in two-wheeler in Thiruvotriyur alone.
4. The agreement entered into between the parties dated 15.12.1993 clearly referred to the sale of immovable assets including tangible and intangible assets transferred including Technical Assistance Agreement etc. The assessee claimed that in view of the agreement thus entered into for sale of the above units viz., units at Thoraipakkam and Ranipet in toto and considering the non-compete clause therein, not to enter into the business, the assessee claimed in its return that the consideration for the sale of units be excluded from the turnover by reason of Explanation 3 to Section 2(r) of the Tamil Nadu General Sales Tax Act, 1959. In support of the claim of the assessee, the assessee produced copies of annual report for the Financial Year 1992-93 and the annual report after transfer i.e., for the Financial Year 1993-94.
5. The Assessing Officer, however, rejected the contention of the assessee on the ground that the Clauses of the Agreement clearly pointed out the separate values agreed upon for the immovable assets and the movable assets, consequently, the question of treating the sales of movable properties as exempt under the provisions of the Tamil Nadu General Sales Tax Act did not apply. The reliance placed on by the assessee in the decision reported in (1977) 39 STC 325 (Mad) in the case of Deputy Commissioner Vs. K.Behanan Thomas was also rejected by the Assessing Officer. In the process, while including the said turnover, the Assessing Officer also levied penalty under Section 12(3)(b) of the TNGST Act.
6. Aggrieved by the demand, the assessee went on appeal before the Appellate Deputy Commissioner (CT) Appeals. The assessee contented that by reason of Explanation 3 to Section 2(r) of the TNGST Act, the sale of business, viz., the Ranipet Unit and Thoraipakkam Unit being the wholesome sale, there was no question of inclusion of the sale consideration as part of the turnover. The assessee further pointed out that the separate indication of the price for the land and the materials included those goods and machinery in progress, per se, would not result in negating the right of the assessee for exemption. The assessee pointed out that as per Clause 2(b) of the agreement, it was for a composite price, as such, the assets were to be transferred at a later date. In this connection, the assessee placed reliance on the decision reported in (1977) 39 STC 325 (Mad) (Deputy Commissioner (C.T).)Coimbatore V. K.Behanan Thomas) and the assessee claimed that the claim could be accepted and the agreement has to be read as one whole and they cannot pick and choose the Clauses.
7. The assessee further pointed out that Clause 2(b) provided the composite price and handing over of the possession to the purchaser on the Effective Date of Transfer (EDT). The assessee further pointed out that the date of the agreement was 15.12.1993 and the effective date of transfer was 31.12.1993. Considering the work thus already in progress, the agreement contemplated the elevation of the price, which, however did not happen at all. Thus, the assessee submitted that Clause 2(b) indicated what would be taken over was the Undertaking as a whole on the effective date and there was no separate contract relating to immovable properties and movable assets. In the circumstances, the assessee pointed out that Clause 2(b) of the agreement was inserted only for the protection of the vendor and cannot be considered to be of any sale of movable assets.
8. The assessee further pointed out that Clause-4 (a)(ii) referred to independent sale of certain assets and the assessee submitted that the the said clause would not relate to the business being sold. The purchaser was given an option to buy these assets for which valuation mechanism was also agreed upon and further that purchaser never opted for purchase of these assets; thus, the question of taking Clause 4(a)(ii) of the agreement as adverse to the claim of the assessee did not arise.
9. The assessee further pointed out that Clause-19 of the agreement contemplated the manner of transfer of the assets and as such, the assessee contended that the order of the Assessing Officer, ignoring the terms of the Contract as well the decision reported in 39 STC 325 (Deputy Commissioner (C.T.) Coimbatore Vs. K.Behanan Thomas) was erroneous to the provisions contemplated under the Tamil Nadu General Sales Tax Act.
10. In considering the claim of the assessee, the First Appellate Authority, however concurred with the reasoning of the Assessing Officer and ultimately held that the contention of the assessee that there was sale of two units could be accepted. The First Appellate Authority also confirmed the penalty.
11. Aggrieved by this, the assessee went on appeal before the Sales Tax Appellate Tribunal, where the assessee reiterated the contentions taken before the authorities below viz., the Assessing Officer as well as the Deputy Commissioner (CT) Appeals. The assessee further contended before the Sales Tax Appellate Tribunal that the authorities below had taken the erroneous view as regards the terms of the contract as well as on the provisions of law and not applied the law laid down in the decision reported in 39 STC 325 (Deputy Commissioner (C.T.) Coimbatore Vs. K.Behanan Thomas).
12. The Sales Tax Appellate Tribunal, however, rejected the contention of the assessee based on the decision reported in 7 STC 720 (1956) in the case of Tools and Machineries Ltd., Vs. State of Madras and thus, upheld the order of assessment. Aggrieved by this, the present Tax Case (Revision) is preferred by the assessee.
13. Learned counsel appearing for the assessee took us through the decisions reported in 39 STC 325 (Deputy Commissioner (C.T.) Coimbatore Vs. K.Behanan Thomas), 51 STC 278 (Monsanto Chemicals of India (P) Ltd Vs. State of Tamil Nadu ), 112 STC 01 (Coromandal Fertilisers Limited Vs. State of A.P.) and pointed out that on going by the terms of the agreement, it is clear that intention of the parties was to sell Thoraipakkam and Ranipet Units, the authorities including the Sales Tax Appellate Tribunal committed serious error in holding that there was separate sale of immovable assets and movable assets by referring to the balance sheets and profit and loss account produced before the authorities below. Learned counsel further submitted that when the parties to the agreement had agreed upon the value for the sale of two units and that the assessee had not agreed to piecemeal sale of business, on the mere fact that the purchaser had given the value of the immovable assets and movable assets separately by itself would not defeat the claim of the assessee for exemption from taxation.
14. We agree with the above submission of learned counsel appearing for the assessee. At the outset, the view of the Sales Tax Appellate Tribunal based on the decision reported in 7 STC 740 in the case of Tools and Machineries Ltd., Vs. State of Madras, clearly shows the incorrect approach to the case on hand which is distinguishable from the reported decision. A reading of the decision reported in 7 STC 740 (cited supra) shows that what was contemplated in the decision reported in 7 STC 740 in the case of Tools and Machineries Ltd., Vs. State of Madras was sale of entire stock in trade and the assessee continued to be in business and retained certain assets of the business. In that context the decision was made holding that the sale of stock could not be taken as the sale of the entire business. On the facts, thus, projected, this Court pointed out that the sale of the entire stock-in-trade as such could not be treated as sale of business in entirety. Thus, when the assessee continued to be in business and retained business in those units, the question of exclusion of turnover relating to stock in trade does not arise.
15. In contrast to this is the decision reported in 39 STC 325 (Deputy Commissioner CT, Coimbatore Vs. K.Behanan Thomas), we find the facts therein was that the assessee sold the branch at Ooty as a whole, consequent on which the Branch itself was closed thereafterwards. Thus, on the closure of a branch by sale thereof as a running concern, this Court held that the sale proceeds in question could not be taken as a part of the turnover, consequently, the question of denying the exemption to the assessee did not arise. This Court pointed out that the sale of stock-in-trade for the purposes of closing down the business is different from the sale of the business as a whole as running concern; the sale of the business, lock, stock and barrel, was not incidental or ancillary to the carrying on of a business so as to be taxable under the Act. Thus, this Court held that the transaction in question would not fall within the scope of the Act at all, consequently, the sale proceeds would not form part of the turnover as defined under the Act. This Court further pointed out that when there was a transfer of the business as a whole or as a going concern, in both the cases, there would be transfers of certain materials. However, when it is a composite sale, the question of bifurcating certain turnover as related to the goods sold for the purposes of assessability did not arise. Pointing out to the distinction arising in the case reported in (1977) 39 S.T.C. 317 in the case of State of Tamil Nadu Vs Thermo Electrics, this Court pointed out that where the assessee retained certain assets and continued the business as a whole, the assessee could not claim the benefit of exemption under the provisions of the Act.
16. The decision reported in 39 STC 325 in the case of Deputy Commissioner (C.T.) Coimbatore Vs. K.Behanan Thomas once again came up for consideration in the decision reported in 51 STC 278 in the case of Monsanto Chemicals of India Ltd., (P) Limited Vs. The State of Tamil Nadu, wherein, this Court pointed out that where under the agreement, the assessee sold to another company certain lines of business as a whole, the question of inclusion of the consideration into turnover of the assessee as incidental or ancillary to the carrying on business did not arise. This Court pointed out that a person may carry on several lines of business and each line of business would be a unit of business by itself; if there is a sale of that unit of the business as a whole, then the assessee would not be liable to be taxed either on the general principle that there is no sale in the course of business, since closure of a line of business could not be incidental or ancillary to its carrying on or on the alternative basis of application of Rule 6(d) of Tamil Nadu General Sales Tax Rules, 1959. Thus, on facts once again, this Court held that the assessee was eligible for exemption in respect of the turnover.
17. In the decision reported in 112 STC 01 in the case of Coromandal Fertilisers Limits Vs. State of A.P., the Full Bench of the Andhra Pradesh High Court considered a similar question and once again reiterated the law laid down by this Court in the decision reported in 39 STC 325 in the case of Deputy Commissioner (C.T.) Coimbatore Vs. K.Behanan Thomas. The case dealt with by the Andhra Pradesh High Court was similar to the case on hand. The Full Bench of the Andhra Pradesh High Court pointed out that when the division of a company, which is operationally and functionally independent for all practical purposes, could not be treated as a transaction in connection with or incidental to running of another independent unit of the company, the transaction relating to the transfer of said business had to be treated as sale of the business as a whole; when there was complete cessation of the business activity in relation to one line of manufacture, then the turnover pertaining to the said line of business could not be included in the turnover of the assessee.
18. Keeping the law declared by this Court reported in 39 STC 325 in the case of Deputy Commissioner (C.T.) Coimbatore Vs. K.Behanan Thomas in this background and looking into the facts and the contract entered into between the parties, it is clear that the contemplation of the parties herein was the transfer of two units engaged in the manufacture of Genset, Agro Engine, Light Engineering components. The assessee was having business in Light Engineering Components at Ranipet; Genset and Agro-Engine were manufactured at Thoraipakkam. The Agreement entered into between the parties dated 15.12.1993 pointed out that the assessee had agreed to sell and transfer and sale the entire business undertaking at Ranipet, which included the leasehold land, buildings, furnitures, fixtures, office equipment and existing infrastructure etc, Machinery and equipment as specified in Schedule A3 and A4 situate therein. The agreement pertaining to the running business viz., Light Engineering components, contemplates the sale of entire business including drawings, designs etc therefor, Mitsubishi Engines/Household Generator sets; all Toolings, fixtures, gauges, instruments, moulds and dies. Clause - 1 of the agreement specify the sale of Ranipet Unit in entirety as the subject matter of transfer. Clause 2 of the agreement also specified the transfer as regards the Thoraipakkam Undertaking in entirety.
19. A reading of the clauses in the appeal show that apart from the land and building, furnitures/fixtures, entire manufacturing equipments comprised in Ranipet Undertaking and Thoraipakkam Undertaking including leased assets, toolings, fixtures, gauges, instruments, moulds and dyes, developed R & D of the Ranipet and Thoraipakkam Undertaking products, drawings, available trade marks, process sheets, available patents, available collaboration agreements, dealership network, dealer and vendor contracts etc., including Research and Development and other intangibles accrued to the products would stand transferred to the purchaser.
20. Clause 3 of the agreement specifies what was excluded under the sale agreement. The effective date of transfer was stated 31st December 1993. A reading of the Clauses in the agreement show except as provided in Clause 12, the use of the name viz., "Enfield" would remain with the assessee i.e., the manufacturer of two-wheeler.
21. Clause 3 of the agreement referred the Mode of Payment and Clause 6 gave the details of Technical Licence Agreement entered into between the assessee and the purchaser. In the light of the terms of the agreement, it is evident that what was contemplated under the agreement referred to above was the transfer of business as a whole in respect of Thoraipakkam Unit and the Ranipet Unit as a going concern from February 1994 to M/s.Greaves Private Limited, Bombay. Since the transfer of these units included every asset and liability, all employees, pending contracts, licences, plant & Machinery, furniture, fixtures etc., and since the manufacturing activity was already in progress, given the time gap between the effective date of transfer and the agreement, parties agreed to the pricing of certain items and in such framework, the agreement was executed in such manner. Thus, what was sold were Undertakings at Thoraipakkam and Ranipet in entirety by the assessee to the purchaser with non-compete clause available in the agreement.
22. In the background of various clauses given, the only ground for the rejection of the claim of the assessee by the Revenue was the separate value given to immovable and movable assets, intangible and tangible assets. We do not find any ground to accept this reasoning of the Revenue. The bifurcation of the price would not in any manner go against the intention of the parties viz., sale of entire unit at Thoraipakkam and Ranipet in favour of the purchaser and going by the various terms of the agreement, we do not find any justifiable ground to accept the submission of learned Government Advocate appearing for the Revenue that the sale consideration would form part of the turnover. It is the case of the assessee that after entering into the agreement and till the Effective Date of Transfer, the assessee continued its business at Thoraipakkam and Ranipet. It is not denied by the Revenue that after entering into the agreement on and from the Effective Date of Transfer, the assessee ceased to carry on the business that was carried on at Ranipet and Thoraipakkam. The non-compete fee clearly pointed out the contention of the parties too. In the background of the above facts and applying the decision reported in 39 STC 325 (Deputy Commissioner (C.T)., Coimbatore Vs. K.Behanan Thomas) as well as the decision reported in 51 STC 278 (Monsanto Chemicals of India (P) Limited Vs. The State of Tamil Nadu), when there is transfer of business as a whole even if it be an unit, which in the present case, were two independent units, we do not accept the case of the Revenue that Explanation 3 to Section 2(r) of the Tamil Nadu General Sales Tax Act, 1959 do stood attracted to the assessee.
23. In the light of the above, the order of the Sales Tax Appellate Tribunal is set aside. Accordingly, the Tax Case (Revision) stands allowed. The demand as well as the penalty levied on the assessee stand set aside. No costs.
(C.V.,J) (T.S.S.,J.) Index:Yes 06.11.2013 Internet:Yes nvsri To 1.The Assistant Commissioner (CT) Zone VII PAPJM Buildings Chennai-600 006 2.The Appellate Deputy Commissioner (CT), Chennai 3.The Tamil Nadu Sales Tax Appellate Tribunal Main Bench, Chennai-600 104 CHITRA VENKATARAMAN, J. and T.S.SIVAGNANAM, J. nvsri Tax Case (Revision) No.49 of 2013 06.11.2013